Transcript: Dr. Sandy Baum’s Testimony on “Drowning in Debt: Financial Outcomes of Students at For-Profit Colleges”

Hearing on “Drowning in Debt: Financial Outcomes of Students at For-Profit Colleges” (June 7, 2011)

Transcript of Testimony by Dr. Sandy Baum, a Senior Fellow at the George Washington University School of Education and Human Development, a Senior Associate at the Institute for Higher Education Policy, an Independent Policy Analyst for the College Board, and an Associated Consultant at HCM Strategists

“Thank you Senator Harkin, members of the committee. I appreciate having the opportunity to be here today and talk with you about this very important issue of student debt and for-profit colleges. The senators have made some very important points. I won’t repeat all of them, but I do think it’s important to begin by saying I’m a strong advocate of student loans. I think borrowing is a very reasonable and appropriate way for students to finance part of their post-secondary education. One of the reasons that I am so concerned about what is being discussed here today is because I think the whole student loan program is actually at risk and the opportunities generated for students are at risk because of some of the abuses that are occurring.

“I also believe that the for-profit sector of post-secondary education has an important role to play. It’s not that it’s bad for there to be some sort of profit going on in education. It’s very clear that there are somethings that some for-profit institutions do that provide opportunities for students that they are unable to find elsewhere.

“That said, the combination of student debt and for-profit institutions is just not working. It’s causing severe problems for students who are accumulating inordinate amounts of debt. It’s causing severe problems for taxpayers who can’t afford to be wasting money in the ways that many of these dollars are being wasted. It’s not working for the institutions themselves. I would think that the for-profit institutions that are doing well for their students would be in the front of the line of people concerned about improved oversight of the industry so that students will be directed into institutions that really can serve them instead of those that are exploiting them. So it’s very important that we address this issue and address it carefully.

“You’ve presented a lot of data, and I know other witnesses will present a lot of data, and I have a lot of data in my written testimony so I won’t focus on data. I would like to point out a few numbers.

“It’s very important to recognize that almost all students in the for-profit sector borrow; that’s just not true in other sectors of higher educations. So virtually no one attending for-profit institutions is actually paying with their own money. Virtually no one has parents who are paying because the people attend for-profit institutions the vast majority are independent students whose parents aren’t in the picture. Most of them come from low-income backgrounds. Most of them just don’t have much money of their own.

“Among Bachelor’s degree recipients who received their degrees in 2007-08, 60% of for-profit students graduated with more than $30,000 of debt; only 12% of those with degrees from the public sector had that much debt. Two-thirds of those students who received associate degrees in public colleges had no debt when they graduated; only 2% of those in the for-profit sector had no debt.

“And the completion rate of bachelor degrees in the for-profit sector are stunningly low. In less than two year program certificates, they do much better and this may be one of the important roles for for-profits in the future.

“The default rate as you’ve noted are extremely high in the for-profit sector, and I think it’s good to know that when you look at the default rate on student loans for the for-profit sector, that’s approximately the percentage of students who are defaulting. But when you look at the default rates for other sectors, particularly community colleges where so few students borrow, that the default rate for students is much lower than the default rate for borrowers.

“For-profit institutions frequently talk about the demographic of their students, saying that the reason their students borrow so much and the reason they default so much is because of their demographics. They come from low-income families. They do. But the fact is when you control for income, you look at people within any race or ethnicity groups, in the for-profit sector students borrow much more money and default with much more frequency than similar students with other sectors.

“For-profit institutions are different. If it weren’t that it’s different to produce things in the for-profit sector then you wouldn’t have all the free market advocates complaining about the role of government. Of course it’s different. It’s the fiduciary responsibility of the owners and managers of for-profit publicly-held enterprises to maximize profit for their shareholders. It’s not because they’re bad people but because that’s what they have to do. The interests of students can’t be at the forefront for them.

“This is not a matter of government versus free market. This is not a free market. This is government funding, and it’s a market characterized by abysmally poor information. The growth in the for-profit sector cannot be explained by consumers just making a choice that maximizes their utility; consumers just don’t have the information. The students choosing these institutions don’t parents who went to college, they don’t have qualified high school counselors to helping them make the decisions. Someone has to help them with better information so they will make wiser decisions.

“We have a complicated system of financing higher education, and we subsidize students in public institutions – not enough but heavily. But the subsidies we’re giving in the for-profit sector are arbitrarily distributed. You default on your student loan, you get a subsidy. This is not the way the government should be allocating its funds; we do it consciously and carefully.

“So we need student loans, we need for-profit institutions, but for-profit institutions can do better. They won’t do better on their own. Their goal is to maximize profits – it has to be. We need to change the incentives facing these institutions. We need to provide the consumers – the students – with much better information about the prospects they face when they attend these institutions. We risk a very well-conceived and effective student loan program if we don’t do better at monitoring on how these students are using these loans and how institutions are allocating these loans.”